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Employee Noncompete Agreements

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FTC Decision on Employee Noncompete Agreements

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FTC Decision on Employee Noncompete Agreements

We call your attention to a major development in employment law that will take effect about four months from now.  The Federal Trade Commission announced on April 23, 2024 that by a 3-2 vote, it has issued a final rule which prohibits noncompetition provisions in employment agreements. The press release by the FTC may be found here:  FTC Announces Rule Banning Noncompetes | Federal Trade Commission and the full text of the Rule may be found here: Non-Compete Clause Final Rule (ftc.gov)

Here Are the Most Important Takeaways

  • In the vast majority of cases, any noncompete provision with an employee will be unenforceable.
  • Noncompete provisions with senior executives are grandfathered in and may still be enforced.
  • Employers will be prohibited from entering into or enforcing new noncompete provisions with any employees, even with senior executives.
  • Except in the case of senior executives, employers must notify their employees that the existing noncompete provisions in their contracts are no longer enforceable and will not be enforced.
  • The FTC has determined that a noncompete agreement with  an employee is an unfair method of competition and therefore a violation of Section 5 of the FTC Act.
  • Employers may still rely upon trade secret laws, non-solicitation of customers and non-recruitment of employees provisions as well as non-disclosure agreements with their employees for protection of their business interests.  The Rule also does not prohibit so-called TRAPs provisions which allow an employer to recoup training expenses from a departing employee.  However, if any of these other provisions are so onerous that they function to prevent an employee from obtaining other employment, they will be deemed covered by the Rule.
  • This Rule will take effect 120 days after it is published in the Federal Register.

This new Rule will likely be challenged in Federal Court as soon as it is made effective.  Some say it may be struck down, forcing the FTC to go back to the drawing board.  In the meanwhile, we strongly encourage each of you to review your employment agreements and employment handbooks to determine if they contain noncompetition clauses.  If so, you might need to  notify you employees that such clauses will no longer be enforceable when this final rule goes into effect.  However, if the Rule is struck down by a Federal Court, such notices might not be necessary.  In any event, as noted above, the employer is not left without any protection against departing employees who have been given access to the employer’s customers and employees.  The restrictive provisions mentioned above, are permitted, if within reason.

If we may be of assistance to any of you in considering your current situation, what should be done to comply with this new FTC Rule, and what can still be done to protect your business, please let us know.